Market-Based Management (R)

Reading: Finegan, J., “Pipe Dreams” Inc.com Magazine, August 1994
Instructor’s resource: MBM Dimensions
Further activity:

Additional reading:

Learning Objectives: Understand and apply Market-Based Management

Corporate Entrepreneurship

Case: Weston, Hilary A., 2000, “Automation Consulting Services”, Harvard Business School Case No. 9-190-053

The following discussion questions can be used:

Instructor’s resource:

Learning Objectives: Understand organisational control mechanisms.

Focus on diversity: Hilary A. Weston was one of the co-authors of the ACS case. 

Prediction Markets

Case: Coles, Peter, Lakhani, Karim and McAfee, Andrew, “Prediction Markets at Google” Harvard Business School Case No. 9-607-088, August 20, 2007

Case preparation: Prediction Markets”, February 2016

Textbook Reading: Chapter 4 (Section 4.5; pp. 127-134)

The following discussion questions can be used:

Here’s an introduction to prediction markets:

 

Also see Kaleidic Economics: http://www.kaleidic.org/prediction-markets

Learning Objectives: Understand how to operate a prediction market.

Internal markets

Case: Wessen, R.R. and Porter, D., “The Cassini Resource Exchange” Ask Magazine 16, Fall 2007, p. 14-18

Textbook Reading: Chapter 4 (Section 4.5; pp. 127-134)

Watch Cassini’s grand finale:

Learning Objectives: Think creatively about how to use markets within organisations

Signalling

Reading: Spence, M., 1973, “Job Market Signaling”. Quarterly Journal of Economics 87(3):355–374
Lecture handout: Signalling*

Textbook Reading: Chapter 3 (Section 3.4; pp. 90-96)

Here’s a lecture video providing an example of the model.

This debate considers the extent to which higher education is merely signalling:

Here’s my treatment of signalling and countersignalling:

In “What toffs and plebs share“, Ed West uses the signalling vs. counter signalling distinction to argue that institutions such as horse racing or the army demonstrate a unity of peasant culture and aristocracy. He identifies a U-curve of social patterns, with those in the middle trying hard to distinguish themselves from those below, even though this reduces their ability to mix with those at the top.

Learning Objectives: Understand the returns to education

Focus on diversity: Claudia Goldin is a world leading labour economist, a former president of the American Economic Association, and co-author of a highly influential book on the earnings gap between high skilled and low skilled workers. She is also a pioneer for studying the role of women in the economy.

Adverse Selection

Reading: Akerlof, G.A., 1970, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism“. Quarterly Journal of Economics 84(3):488–500 (£)

Textbook Reading: Chapter 3 (Section 3.4; pp. 90-96)

Group activity:

  • If you are a bit daunted by an academic article, George Akerlof wrote a very interesting essay on how he came up with the ideas and the process of working on the topic. You can read it at the Nobel site.
  • Further reading: Secrets and agents“, The Economist, July 23rd 2016

Here’s a good video explaining the lemons problem:

Learning Objectives: Think critically about the role of asymmetric information on market performance

Cutting edge theory: Product heterogeneity and customisation

Focus on diversity: Amy Finkelstein, of MIT, was featured by The Economists 2008 list of emerging economists for her work on asymmetric information in health insurance. She won the John Bates Clark medal in 2012.

Spotlight on sustainability: Importance of long term reputational effects of short term strategic choices

Capital Theory

Lecture handout: Capital theory*

Textbook Reading: Chapter 6

There is still a website containing the “Millennium Dome Collection”, but this Guardian article provides a thorough retrospective.

Here is the video of the Sinclair C5 Infomercial:

Here is a lovely list of repurposed American gas stations.

For more on business plan ecology, see

Learning Objectives: To understand what capital goods are

Spotlight on sustainability: Look at instances where resources have been reconfigured for alternate uses

Auctions

Case: Hild, M., Dwidevy, A., and Raj, A., 2004, “The Biggest Auction Ever: 3G Licensing in Western Europe”, Darden Business Publishing

Discussion question: What are the alternatives to auctions?

Textbook Reading: Chapter 3 (Intro and Section 3.3; pp. 65-67 and pp.83-89) and Chapter 12 (Section 12.4; pp. 434-437

In October 2020 Paul Milgrom and Robert Wilson were awarded a Nobel prize for their work on auction theory and design. Tim Harford provided a neat overview of their contribution in the Financial Times. As he says,

A well-designed auction forces bidders to reveal the truth about their own estimate of the prize’s value. At the same time, the auction shares that information with the other bidders. And it sets the price accordingly. It is quite a trick.

In this lecture video Tim Roughgarden “provides a detailed case study of the 2016-2017 Federal Communications Commission incentive auction for repurposing wireless spectrum”. It demonstrates how economics, computer science and business can coincide to solve complete real world problems.

This video shows how the Dutch clock works in a flower auction:

Background reading:

  • McMillan, J., (2002) “Come bid!” in Reinventing the Bazaar, W.W. Norton & Co (pp. 75-88 and 68-72)

Consider the following video:

Having read the 3G case,

  • Is there evidence of the Coase theorem in the 3G case?
  • Is there evidence of the Transitional Gains Trap in the 3G case?
Instructor resource: The Biggest Auction Ever: What Happened Next?, February 2019

Here’s more detail on spectrum auctions:

A great podcast on auctions is “Auction Fever” from Planet Money.

    • Discussion points:
      – Anchoring heuristic
      – Starts with a Dutch auction then turns to English one
      – Info asymmetry is reduced by testing
Learning Objectives: To consider how auctions compare to other allocation mechanisms. To understand different types of auction and apply them to real examples.

Cutting edge theory: Auctions are used in e-commerce

Focus on diversity: An expert on applied auction formats, Susan Athey was the first female winner of the John Bates Clark medal. She has been an advisor to Microsoft and you can follow her on Twitter here

Spotlight on sustainability: How governments can use beauty contests to mitigate the environmental impact of infrastructure spending

Oligopoly

Group activity: Cournot and Bertrand Games, December 2018

The activity is based on Beckman, S. R., 2003, “Cournot and Bertrand games” Journal of Economic Education, Vol.34, No.1, pp.27-35

Textbook Reading: Chapter 5 (Section 5.2; pp. 139-145)

Here’s Bart Wilson on the meaning of the word “fair”:

Learning Objectives: Gain experience of iterated prisoner’s dilemmas

Markets in everything

Reading: I’ve got debts, please buy my kidneys” The Times September 27th 2009

Discussion question: What are some different ways in which we could allocate kidneys?

In April 2021 a New Jersey man sued the federal government for the right to sell his own kidneys:

“If the opportunity existed so that I could help out someone in need while helping myself, I might do it,” Bellocchio said.

Bellocchio argues that kidney transplants are low-risk procedures, and notes that you can donate an organ — even though you can’t sell one.

“Altruistic donors are lauded for their selflessness. Their vital role in saving lives is undeniable,” the court papers say.

“However, demand outstrips supply, and there is no valid constitutional or public policy rationale why one should not be able to receive a profit from such a transaction.”

Further reading: Postrel, V., “Here’s Looking at You, Kidney” Texas Monthly, June 2006

Consider the case of sulphur dioxide emissions (via McMillan, J., (2002) Reinventing the Bazaar, W.W. Norton & Co. (p.182-187) link ), and notice how for many environmental activists the moral objections to trading rights to pollute seemingly outweighed the dramatic progress on reducing harmful pollution. This implies that switching people’s mindset to tolerate market mechanisms could be an incredibly powerful tool to improve the world around us.

Learning Objectives: Understand the scope and ethical boundaries of markets

Focus on diversity: Virginia Postrel’s decision to donate a kidney, and write about it, provides a personal and inspirational view of the topic.